Billy SilvaCommentary, analysis, insight from the Foundation for Economic Educationhttps://fee.org/feed?author=billy-silva2017-12-13T21:23:51-05:00Billy Silvahttps://fee.org/people/billy-silva/bsilva@fee.orgFEE.org Feeds by DavidVhttps://fee.org/articles/from-bitcoin-to-ether-todays-blockchain-basics/From Bitcoin to Ether: Today's Blockchain BasicsBitcoin has served as a proof of concept for peer-to-peer electronic cash.2017-07-11T13:30:00-04:002017-07-11T13:30:00-04:00Billy Silvahttps://fee.org/people/billy-silva/<img src="https://fee.org/media/23694/blockchain_mini.jpg"/> <p id="a46d" class="graf graf--p graf--hasDropCapModel graf--hasDropCap graf-after--figure">Bitcoin and its underlying technology blockchain are game-changing technologies that are reshaping and revolutionizing the world economy. (<a rel="nofollow noopener noreferrer" href="http://www.mckinsey.com/industries/high-tech/our-insights/how-blockchains-could-change-the-world" target="_blank" class="markup--anchor markup--p-anchor" data-href="http://www.mckinsey.com/industries/high-tech/our-insights/how-blockchains-could-change-the-world">1</a>)</p>
<p id="ba82" class="graf graf--p graf-after--p">Often hidden behind the headlines of Bitcoin’s meteoric rise in market value and blockchain’s technological promise is a basic understanding of what these two technologies are and where they come from.</p>
<p id="2715" class="graf graf--p graf-after--p">This brief article examines the digital currencies Bitcoin and Ethereum and introduces Blockchain, the technology that facilitates the digital transfer of value and much more.</p>
<p id="1e4b" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">Bitcoin: The Beginning?</strong></p>
<p>“I think the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash.” — Milton Friedman, ‘99’</p>
<p id="b07f" class="graf graf--p graf-after--pullquote">In 2008, a person or group of people acting under the pseudonym Satoshi Nakamoto published a white paper titled<span> </span><a rel="nofollow noopener noreferrer" href="https://bitcoin.org/bitcoin.pdf" target="_blank" class="markup--anchor markup--p-anchor" data-href="https://bitcoin.org/bitcoin.pdf"><em class="markup--em markup--p-em">Bitcoin: A Peer-to-Peer Electronic Cash System</em></a>. The paper introduced a solution to two puzzling issues.</p>
<p id="579f" class="graf graf--p graf-after--p">The first was our inability to transfer money digitally between willing participants without the need of a trusted third party. The second was that a function was needed to transfer money digitally with the ability to establish the order of transactions to avoid double spending.</p>
<p id="a4f0" class="graf graf--p graf-after--p">Nakamoto proposed two solutions:</p>
<ol>
<li id="9087" class="graf graf--p graf-after--p">A peer-to-peer currency capable of maintaining its value without a central authority.</li>
<li id="5419" class="graf graf--p graf-after--p">A decentralized digital ledger capable of establishing the order of transactions.</li>
</ol>
<p id="581a" class="graf graf--p graf-after--p">The ledger would operate much the same as any other, except that the recorded transactions would be distributed to computers around the world.</p>
<p id="af8b" class="graf graf--p graf-after--p">In 2009 the ability to transfer value digitally was born in what is widely known as Bitcoin. However, it is the second capacity, now known as blockchain that is proving to be of far greater significance.</p>
<p id="c004" class="graf graf--p graf-after--p">Although blockchain has scarcely found its way into mainstream thinking and discourse, it is, as mentioned, revolutionizing the world economy.</p>
<p id="79e3" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">Bitcoin and Ethereum</strong></p>
<p id="3bd2" class="graf graf--p graf-after--p">Since inception, Bitcoin has captured the attention of an ever-growing, and yet relatively small, number of investors, enthusiasts, companies, and others around the globe.</p>
<p id="3b90" class="graf graf--p graf-after--p"><span class="rte-quote">Bitcoin has served as a proof of concept for peer-to-peer electronic cash.</span>As it has grown, it has served the dual function of acting as proof of concept for a “peer-to-peer version of electronic cash” and simultaneously giving rise to thousands of other digital currencies.</p>
<p id="a43a" class="graf graf--p graf-after--p">The most well known of these currencies by market value are Bitcoin and Ethereum. Bitcoin’s current market value is $37 Billion USD, while Ethereum’s is $16 Billion USD.</p>
<p id="74d9" class="graf graf--p graf-after--p">Any attempt however to compare the two cannot be accurately described as an apples-to-apples comparison. More about this later. First, let's look at what Bitcoin actually is.</p>
<p id="495b" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">Bitcoin</strong></p>
<p id="6b5f" class="graf graf--p graf-after--p">Bitcoin is a decentralized peer to peer electronic version of cash that maintains its value without backing or inherent value. It allows the transference of money digitally without going through a trusted third party such as a bank or credit card.<span> </span><a rel="nofollow noopener noreferrer" href="https://github.com/ethereum/wiki/wiki/White-Paper" target="_blank" class="markup--anchor markup--p-anchor" data-href="https://github.com/ethereum/wiki/wiki/White-Paper">(3)</a></p>
<p style="text-align: center;" class="graf graf--p graf-after--p"><img style="width: 600px; height: 222.12765957446808px;" src="https://fee.org/media/23693/blockchainus1.png?width=600&amp;height=222.12765957446808" alt="" data-udi="umb://media/302b4ec5b63f4376bccb346b196d5a59" /></p>
<p id="bd27" class="graf graf--p graf-after--figure">The first standardized value of Bitcoin was set on October 5th, 2009 at $.0008, calculated using $1USD equals 1309.03 Bitcoin (BTC). It presently trades at more than $2300 USD. This represents 2.9 million x its initial value. (<a rel="nofollow noopener noreferrer" href="http://historyofbitcoin.org/" target="_blank" class="markup--anchor markup--p-anchor" data-href="http://historyofbitcoin.org/">4</a>)</p>
<p id="450f" class="graf graf--p graf-after--p">According to the <em>Washington Post</em>, if you had purchased $100 in Bitcoin seven years ago, those coins would be worth more than $73 million USD today. To put this into perspective, if you had invested $100 into Amazon.com when it went public in 1997, your investment would be worth just under $64,000. It is worth noting, however, that digital currencies are significantly more speculative than stocks like Amazon. (<a rel="nofollow noopener noreferrer" href="https://www.washingtonpost.com/news/on-small-business/wp/2017/05/2" target="_blank" class="markup--anchor markup--p-anchor" data-href="https://www.washingtonpost.com/news/on-small-business/wp/2017/05/2">5</a>)<span> </span><a rel="nofollow noopener noreferrer" href="http://www.investopedia.com/articles/investing/082715/if-you-had-invested-right-after-amazons-ipo.asp" target="_blank" class="markup--anchor markup--p-anchor" data-href="http://www.investopedia.com/articles/investing/082715/if-you-had-invested-right-after-amazons-ipo.asp">(6)</a></p>
<p id="ff00" class="graf graf--p graf-after--p">As the price of Bitcoin goes higher, one question that naturally comes to mind is, Where do Bitcoins come from?</p>
<p id="b144" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">Mining</strong></p>
<p id="367e" class="graf graf--p graf-after--p">Where do Bitcoins come from if by definition they are not backed by any central authority? Bitcoins are actually “mined” into existence by Bitcoin miners.</p>
<p id="029f" class="graf graf--p graf-after--p">The easiest way to think about this is to consider gold miners. Gold miners work to mine gold from the earth. As it is mined, it then enters the economy. Conceptually, Bitcoin is the same.</p>
<p id="7b7f" class="graf graf--p graf-after--p">New Bitcoins are generated through a competitive process called mining. Miners are given Bitcoins as rewards for their services processing transactions and securing the network using highly specialized hardware. <a rel="nofollow noopener noreferrer" href="https://worryandpeace.com/cyber-insurance/what-is-bitcoin/" target="_blank" class="markup--anchor markup--p-anchor" data-href="https://worryandpeace.com/cyber-insurance/what-is-bitcoin/">(7)</a></p>
<p id="7c07" class="graf graf--p graf-after--figure">Investopedia offers a more in-depth explanation of the<span> </span><a rel="nofollow noopener noreferrer" href="http://www.investopedia.com/articles/investing/043014/what-bitcoin-mining.asp" target="_blank" class="markup--anchor markup--p-anchor" data-href="http://www.investopedia.com/articles/investing/043014/what-bitcoin-mining.asp">process of mining</a>.</p>
<p id="dc86" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">How Are Bitcoins Used?</strong></p>
<p id="d9bf" class="graf graf--p graf-after--p">After Bitcoins are mined into existence, how are they used and what are they used for?</p>
<p id="7d4b" class="graf graf--p graf-after--p">Bitcoins are traded on exchanges like stocks, bonds, and currencies, and are also used as currency in the exchange of goods and services.</p>
<p id="5d91" class="graf graf--p graf-after--p"><span class="rte-quote">Japan is the first nation to officially accept Bitcoin for payments.</span>The number of vendors and merchants accepting Bitcoins for the exchange of goods and services is expected to grow from the 1000’s to the 100,000's now that Japan is accepting Bitcoins as currency.</p>
<p id="bc00" class="graf graf--p graf-after--figure">Japan is the first nation to officially accept Bitcoin for payments. More than 300,000 merchants will begin accepting Bitcoin payments in that country alone.<span> </span><a rel="nofollow noopener noreferrer" href="https://futurism.com/by-this-summer-bitcoin-will-be-accepted-at-more-than-260000-stores-in-japan/" target="_blank" class="markup--anchor markup--p-anchor" data-href="https://futurism.com/by-this-summer-bitcoin-will-be-accepted-at-more-than-260000-stores-in-japan/">(8)</a></p>
<p id="6e44" class="graf graf--p graf-after--p">Here is a list of<span> </span><a rel="nofollow noopener noreferrer" href="http://www.ebay.com/gds/100-Companies-That-Accept-Bitcoins-As-Payment-/10000000206483242/g.html" target="_blank" class="markup--anchor markup--p-anchor" data-href="http://www.ebay.com/gds/100-Companies-That-Accept-Bitcoins-As-Payment-/10000000206483242/g.html">100 major US-based retailers</a><span> </span>currently accepting Bitcoin.</p>
<p id="1283" class="graf graf--p graf-after--p">Bitcoin, however, is not the only digital currency growing in value and capturing global attention.<span> </span>Ethereum<span> </span>shares many of these characteristics with Bitcoin while also possessing several unique qualities.</p>
<p id="72fc" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">Ethereum</strong></p>
<p id="533a" class="graf graf--p graf-after--p">“I would say Ethereum boasts features and opportunities to things Bitcoin doesn’t. It’s like saying a telephone can beat an orange.” — Vitalik Buterin, 2014 <a rel="nofollow noopener noreferrer" href="https://www.youtube.com/watch?v=WfULutvxvzY" target="_blank" class="markup--anchor markup--p-anchor" data-href="https://www.youtube.com/watch?v=WfULutvxvzY">(9</a>)</p>
<p class="graf graf--p graf-after--p">While Bitcoin was first to market and has drawn most of the media attention, many believe that the Ethereum blockchain, and its currency Ether, is a much more powerful tool.</p>
<p id="bceb" class="graf graf--p graf-after--p">In 2013, then-19-year old Vitalik Buterin proposed Ethereum in a<span> </span><a rel="nofollow noopener noreferrer" href="https://github.com/ethereum/wiki/wiki/White-Paper" target="_blank" class="markup--anchor markup--p-anchor" data-href="https://github.com/ethereum/wiki/wiki/White-Paper">white paper</a><span> </span>titled “Ethereum White Paper: A Next Generation Smart Contract and Decentralized Application Platform.”</p>
<p id="919b" class="graf graf--p graf-after--figure">The development of the protocol was crowd-sold in 2014, raising over $150 million USD. The system itself was finally launched on July 30, 2015.</p>
<p id="eede" class="graf graf--p graf-after--p">Ethereum is an open source blockchain platform and its fundamental contention is this, that blockchains can be used for more than just the transfer of money.</p>
<p id="7675" class="graf graf--p graf-after--p">Additional use cases include currencies, financial instruments, property, domain names, along with more sophisticated cases like exchanges, derivatives, peer to peer gambling, and identity and reputation systems. (<a rel="nofollow noopener noreferrer" href="https://github.com/ethereum/wiki/wiki/White-Paper" target="_blank" class="markup--anchor markup--p-anchor" data-href="https://github.com/ethereum/wiki/wiki/White-Paper">10</a>)</p>
<p id="baf5" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">Smart Contracts</strong></p>
<p id="9eca" class="graf graf--p graf--startsWithDoubleQuote graf-after--p">“Smart contracts” are one of Ethereum’s most important contributions to the rapidly expanding universe of digital currencies and blockchains.</p>
<p id="7906" class="graf graf--p graf-after--p">They can be thought of as a digital means of facilitating the exchange of anything of value in a way that is transparent and removes middlemen such as lawyers, notaries, and others. Smart contracts perform this function by carrying out the terms of the digital contract itself. (<a rel="nofollow noopener noreferrer" href="https://blockgeeks.com/guides/smart-contracts/" target="_blank" class="markup--anchor markup--p-anchor" data-href="https://blockgeeks.com/guides/smart-contracts/">11</a>)</p>
<p id="3fb7" class="graf graf--p graf-after--p">Another of Ethereum’s unique characteristics is its digital currency Ether.</p>
<p id="8173" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">Ether</strong></p>
<p id="8fe8" class="graf graf--p graf-after--p"><img style="float: left;" src="https://fee.org/media/23696/ethersymbols.png?width=170&amp;height=473" alt="" width="170" height="473" data-udi="umb://media/788149c8d4c7449193af13861deabd82" />Ethereum, like Bitcoin is a digital currency. However, unlike Bitcoin, it is also a blockchain platform. Ethereum’s currency, Ether is used primarily to access the Ethereum network.</p>
<p class="graf graf--p graf-after--p">The Ethereum Foundation defines Ether as a<span> </span><em class="markup--em markup--p-em">fuel</em><span> </span>or a form of payment that is used by clients of the Ethereum platform to pay for the machines that are executing the requested operations. (<a rel="nofollow noopener noreferrer" href="https://ethereum.org/ether" target="_blank" class="markup--anchor markup--p-anchor" data-href="https://ethereum.org/ether">12</a>)</p>
<p id="9db2" class="graf graf--p graf-after--p">Unlike Bitcoin, Ethereum has two digital currencies trading in the market. The first is Ethereum which trades under the symbol — ETH. While the other, known as Ether Classic, trades under the symbol ETC.</p>
<p id="359b" class="graf graf--p graf-after--figure">In June 2016 a large scandal rocked the Ethereum community. A still-unknown hacker attempted to steal more than $50 million dollars due to a software bug. The end result was the creation of a second Ether trading currency.</p>
<p id="978d" class="graf graf--p graf-after--p">If it is of greater interest here are two articles that explain the hack in more detail<span> </span><a rel="nofollow noopener noreferrer" href="http://www.investopedia.com/articles/investing/080516/why-are-there-now-two-ethereums.asp" target="_blank" class="markup--anchor markup--p-anchor" data-href="http://www.investopedia.com/articles/investing/080516/why-are-there-now-two-ethereums.asp">Article 1</a><span> </span>&amp;<span> </span><a rel="nofollow noopener noreferrer" href="http://www.coindesk.com/understanding-dao-hack-journalists/" target="_blank" class="markup--anchor markup--p-anchor" data-href="http://www.coindesk.com/understanding-dao-hack-journalists/">Article 2</a>. For a more technical explanation<span> </span><a rel="noopener noreferrer" href="https://medium.com/@MyPaoG/explaining-the-dao-exploit-for-beginners-in-solidity-80ee84f0d470" target="_blank" class="markup--anchor markup--p-anchor" data-href="https://medium.com/@MyPaoG/explaining-the-dao-exploit-for-beginners-in-solidity-80ee84f0d470">read this article</a> by Maria Paola Gelvez Gomez, former head of Coinbase in Latin America.</p>
<p id="cecd" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">Where Does Ether Come From and What Is It Used For?</strong></p>
<p id="8263" class="graf graf--p graf-after--p">Similar to Bitcoin, Ethereum is also mined. Groups of “miners” work to validate and store the transactions taking place on the Ethereum platform. The <em>Huffington Post</em> presented a clear and coherent article on<span> </span><a rel="nofollow noopener noreferrer" href="http://www.huffingtonpost.com/entry/ethereum-mining-101-your-complete-guide_us_58b6e1eee4b02f3f81e44e9f" target="_blank" class="markup--anchor markup--p-anchor" data-href="http://www.huffingtonpost.com/entry/ethereum-mining-101-your-complete-guide_us_58b6e1eee4b02f3f81e44e9f">Ethereum mining</a>.</p>
<p id="cbb7" class="graf graf--p graf-after--p">While Bitcoin and other digital currencies can be used to purchase goods and services, as mentioned, Ether is primarily used for transactions associated with accessing the Ethereum network and trading.</p>
<p id="f456" class="graf graf--p graf-after--p">What is most important to remember about Ethereum is that it is not only a digital currency, it is also blockchain based platform with smart contracts, and it allows for the building of apps, of which digital currencies are but one expression.</p>
<p id="ef15" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">Blockchain</strong></p>
<p id="af43" class="graf graf--p graf--startsWithDoubleQuote graf-after--p">“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” Don and Alex Tapscott <a rel="nofollow noopener noreferrer" href="https://www.linkedin.com/pulse/whats-next-generation-internet-surprise-its-all-don-tapscott" target="_blank" class="markup--anchor markup--p-anchor" data-href="https://www.linkedin.com/pulse/whats-next-generation-internet-surprise-its-all-don-tapscott">(13)</a></p>
<p id="ec7d" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">What is a Blockchain?</strong></p>
<p id="3b9d" class="graf graf--p graf-after--p">Nakamoto Satoshi’s initial description of the framework needed to facilitate the movement of online payments between two willing participants without an intermediary has become known as blockchain.</p>
<p id="955f" class="graf graf--p graf-after--figure">In its most simple form blockchain is a decentralized ledger. The implications of blockchain however, are far greater than the simplicity its name implies.</p>
<p id="860b" class="graf graf--p graf-after--p"><span class="rte-quote">As the internet facilitates the digital transfer of information, blockchain facilitates the digital transfer of value.</span>Blockchain facilitates the digital transference of value itself. Sally Rivers, <em>Financial Times</em> technology writer describes the relationship between blockchain and digital currencies like Bitcoin: <span class="markup--quote markup--pullquote-quote is-other" data-creator-ids="anon">“[Blockchain] is to Bitcoin, what the internet is to email.”</span></p>
<p id="1719" class="graf graf--p graf-after--pullquote">In the same way the internet facilitates the digital transfer of information, blockchain facilitates the digital transfer of value.</p>
<p id="ee62" class="graf graf--p graf-after--p">Industries in which blockchain technology is being rapidly explored and deployed include the capital markets, financial services, payments and remittances, derivatives, identity and reputation management, governance, sharing economy, supply chain, auditing, stock trading, internet of things, insurance, healthcare, and others.</p>
<p id="61d6" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">A Few Takeaways</strong></p>
<p id="7b44" class="graf graf--p graf-after--p">Digital currencies and Blockchain technology are truly reshaping the world economy. We may, however, be too close to their inception to accurately assess their importance or ultimate impact.</p>
<p id="6715" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">A few key thoughts from this post:</strong></p>
<ul class="postList">
<li id="48c1" class="graf graf--li graf-after--p">Bitcoin was founded in 2008 and launched in 2009. Bringing with it digital currencies and the underlying technology, blockchain.</li>
<li id="acb8" class="graf graf--li graf-after--li">There are thousands of new digital currencies of which Bitcoin ($30bil) and Ethereum ($16bil) are the largest in terms of market value.</li>
<li id="87b1" class="graf graf--li graf-after--li">These currencies are created through a process of digital mining akin to mining for gold.</li>
<li id="650f" class="graf graf--li graf-after--li">Many of these currencies are traded on exchanges like stocks, and used for the purchase of good and services.</li>
<li id="9749" class="graf graf--li graf-after--li">Ethereum recognized blockchains can be used for more than digital currencies, and introduced smart contracts.</li>
<li id="2e9f" class="graf graf--li graf-after--li">Blockchain is to Bitcoin, as the internet is to email.</li>
</ul>
<p id="ddf3" class="graf graf--p graf-after--li">One of the best and most insightful presentations on Blockchain is a<span> </span><a rel="nofollow noopener noreferrer" href="https://www.youtube.com/watch?v=ylBMDdpHmho" target="_blank" class="markup--anchor markup--p-anchor" data-href="https://www.youtube.com/watch?v=ylBMDdpHmho">30-minute video</a><span> </span>created by Farzam Ehsani, Blockchain Lead at the Rand Merchant Bank in South Africa. I highly recommend it to everyone.</p>
<p id="64e1" class="graf graf--p graf-after--p">Referring to the unfoldment of this new technological development, in a polite and slightly prophetic tone Mr. Ehsani shared in his closing statement, “We are on that journey, and there’s no turning back.”</p>
<p id="bca7" class="graf graf--p graf-after--p">It is indeed true. We are on a new digital journey, and no, there is no turning back!</p>
<p id="1f66" class="graf graf--p graf-after--p">If you have any comments or suggestions about interesting topics related to blockchain technology, <a rel="nofollow noopener noreferrer" href="https://twitter.com/bsilva9" target="_blank" class="markup--anchor markup--p-anchor" data-href="https://twitter.com/bsilva9">reach out to me on Twitter!</a></p>
<p style="text-align: right;" class="graf graf--p graf-after--p graf--trailing"><em>Reprinted from <a href="https://medium.com/tradecraft-traction/blockchain-for-the-rest-of-us-c3fc5e42254f">Tradecraft</a>.</em></p>